The Gold Report recently spoke with Ron Struthers, who has been publishing the Struthers' Resource Stock Report, also known as Resource Stock Advisory and Struthers' Resource/Tech Report, for over 16 years. Ron focuses on mining and oil & gas and one to three tech stocks a year, and he tries to find stocks that are not yet discovered and get in before the crowd. Most of these are special situation stocks that are on the verge of new mineral discoveries or are moving to producer status or simply on an accelerating growth path. Coverage includes senior and junior companies with lots of trading liquidity, mostly trading on the Canadian and U.S. exchanges as well as a few trading on foreign exchanges. Ron's a long-term investor, picking major trends and sticking with them over the course of their move. Some of his picks (held between 5 to 10 years) have had stellar results. Examples include Ultra Petroleum - up 13,300%, Research in Motion - up 8,160%, Western Silver (bought out) - up 3,533%, and Glamis Gold (bought out) - up 1,705%.
TGR: Gold and silver have gone down in the last few days. What are your impressions of the marketplace for precious metals?
STRUTHERS: I think this recent correction is just normal market activity. We've had a strong run-up and set record highs in gold; I think the market was anticipating the record and looked at that as a pullback or a profit-taking opportunity, so more of a short-term thing. In the longer term, I think we will go much higher.
TGR: And in your estimate how much higher will we go and over what timeframe?
STRUTHERS: I really don't focus too much on prices and timeframe, just the trend. A key thing I pointed out back in August and September was how gold bullion and gold stocks finally disconnected from the major market indexes. Many times in the past few years, I have pointed out how gold stocks have moved up and down with the NASDAQ. I compared often how these markets moved together. Most often we had a scenario where all precious metals, commodities and the major stock indexes generally moved up and down together. But in August when subprime problems first hit the market, the major stock indexes were getting hit, but gold, gold stocks and commodities continued to rise and hold their value. They really only got hit in the last couple of days in that August sell-off, and fell far less than the major market indexes.
So I think something really different happened here. Gold and gold stocks and commodities became the cash component of many mutual funds and hedge funds, instead of the cash component that was supposedly in safe triple A-rated paper. When that failed or prices dropped too low and they didn't want to take that loss, the funds rather predictably sold off their assets at a rapid pace to raise the cash – and that was gold and other commodities. Even with all that selling, the commodity prices remained quite firm and dropped less than 4% as measured by the old CRB Index. And that compared to 11%, to 14% on the stock indexes.
So, when the big money, the funds, witnessed how gold and the commodities performed as a perfect hedge, it really helped bail them out. The first thing they wanted to do is buy back gold and more, and I think this helped drive the recent move to new highs in the gold and commodity markets.
They've also got a lot of trouble yet in the U.S., in the real estate market and the economy down the road. Real estate has farther to fall, and the economy is going to get weaker. I think because of the huge amount of U.S. debt, the Fed is scared to death of a debt implosion that could result if we got a good recession. So they will continue to lower interest rates to inflate the money supply to no end to avoid this. With the continued weakness in the U.S. dollar, investment money in U.S. assets is flowing into alternative investments and precious metals. And commodities have seen a lot of these dollars.
I think another key thing many fail to realize is that all major commodity/gold bull markets are driven by investment demand, and those who keep focusing on supply-and-demand fundamentals only are missing the boat.
You know, this bull market in gold has been going on for almost five years now. Many market pundits who have been getting it wrong all the way along keep saying, "These prices won't be sustained." And then we move up again, to a higher trading range. And they say, "That can't be sustained either." But we just keep going.
TGR: With the continued monetary issue you outlined earlier, do you feel there are any advantages in investing in the seniors versus the juniors at this time?
STRUTHERS: I think in the seniors it depends a lot on where they're located because costs are also rising, and depending on what currency and what country your mine is in. Those factors are affecting the costs, which I think also has been a factor in holding the seniors back somewhat. The recent rise in the gold prices has broken out in pretty much all currencies, though, which will start overcoming a lot of those costs.
But the other point is that this same situation also makes any discovery the juniors make worth just that much more money. So I think we will continue to see higher buyer prices as deposits are discovered. Eventually, this should translate into a pick-up in the junior market. That's been kind of slow to catch on, and they've been lagging quite a bit.
I think there are another couple of other factors also. I don't think the mainstream and the retail markets have really caught onto this bull market yet. There hasn't been a whole lot of media coverage on gold's rise, outside the usual circles. Mostly, they've focused on oil, the U.S. dollar, and the subprime problem.
And I also think that many of gold followers were also surprised by the speed of the recent move up in gold, and that there was some expectation that we would go up and hit a record, or go up to the old high there, closing around 830, and that gold would pull back. So, I think it's key now how gold reacts in this pullback and how it consolidates and moves from here, because I'm expecting the next move up to bring a lot more buying into the gold stocks and the juniors as well.
TGR: Would you expect the next move up to break the previous high?
STRUTHERS: We could go to that right away, or we may run, pull back again, and take another run. I think a lot of it will depend on how everyone is reading the situation in the U.S. We could get news of some banking problems, problems any day, and bang, gold could go running, or maybe we will be quiet for a few weeks. It's hard to say, but I think that between now and the first quarter of next year we're going to see much higher prices.
TGR: The international markets also have gone down in response to what is happening in the U.S. and the continued announcements by banks related to subprime losses. Are you watching anything in the international markets that gives you a clue as to what is going to happen with gold on a global basis?
STRUTHERS: One thing I have started to watch more closely is the ETFs. I think the volume you see in there might be some indication. I am expecting the volumes in the ETFs to pick up. Decades ago, people lined the streets at coin dealers to buy gold, but we're a different market now. I think people will mainly be buying ETFs rather than gold coins, and so I think watching volumes on the ETFs and charting the technicals on them also. These will help give a good idea where gold is heading, particularly now, when we're seeing more new people come into the gold market.
TGR: Silver has really been lagging behind the rise in gold. Any insights you can provide in looking at the silver market?
STRUTHERS: With silver, I am actually more bullish, because in percentage terms, I think it will rise further. It's a much smaller market, and I think it will take less to get that market going and it's been in deficit so long. It's a little different from gold because silver actually has a lot of industrial uses, which has been creating a lot of demand on the market. So if you add investment demand on top of the industrial demand, it could have quite a significant impact. I wouldn't be surprised to see twice the percentage gain in silver versus gold.
TGR: What are you watching to give you the signal that silver is going to break out?
STRUTHERS: I've just been looking mainly at the technicals and the charts. We did have a breakout there along with gold; maybe silver took a little bit longer, but it broke out slightly above the last high of 2006 . So that was key, and I think silver will go along with gold in the next run, and probably outperform it.
TGR: And how are you looking at the silver mining stocks?
STRUTHERS: I follow a lot in Mexico. That's one of my favorite areas as far as mining investment, and it also happens to be one of largest producers of silver. There's been a lot of success there in the past, and there's going to be other significant silver discoveries in Mexico in the years down the road.
Palmarejo Silver and Gold Corporation [TSX-V: PJO] was bought out by Coeur d'Alene Mines Corp. [TSX: CDM] this year for about a billion dollars.
TGR: What are the top several companies you're really watching with interest in this marketplace?
STRUTHERS: Two of them are silver plays. One of them is Paramount Gold & Silver Mining (AMEX: PZG), and they are located in Mexico. They're in the Sierra Madre; they're not too far from the Palmarejo Discovery and my feeling is that they will probably make the next discovery there. Their first 43-101 was 38 million ounces with about 38 drill holes; that was very good. They're in the middle of a 50,000-meter program now. They did large financing with institutions. So, I definitely think that's going to be one of the next silver discoveries in Mexico.
And then also I'm following a few in Idaho, SNS Silver Corp. (OTC:SNSFF), for example. They've taken over the old Crescent Mine in Idaho, reopening the mine and about to do drilling underground. I expect that drilling to start in the next week or two. They had been drilling from the surface and striking veins up there. Now the intent is to go underground and prove up with a resource that they can quickly go into production with the mine infrastructure there and the mill nearby.
And then on the golds, one I'm following is HY Lake Gold Inc. (HYLKF.PK) ; they trade on the CNQ, so it's a bit under the radar, but they're up next to the Gold Eagle discovery in Red Lake, which has been quite significant. And HY Lake also did a joint venture with Goldcorp Inc. (NYSE:GG) and now controls quite a piece of land, so they're probably on track for the next discovery in that region. They have three old mines on the strike they control.
And also in Canada, another one is Eastmain Resources Inc. [TSX: ER]. They're up towards Quebec, near the E'le'onore discovery that Goldcorp bought out. And it looks like Eastmain could have a similar type discovery there. They've discovered quite a zone. They're doing channel samples across it now, so I'm watching the results of these channel samples. If they come back as good as some of the first ones, they could be outlining quite a significant zone there. So, that's a couple of golds, both in Canada.
TGR: Some of our readers are very interested in learning about a couple of our gold companies, specifically Goldcorp, Gold Fields Limited (NYSE:GFI) and Terrane Metals Corp. [TSX-V: TRX]. Can you give us any comments on those companies and how they're doing?
STRUTHERS: I follow those three. Both Goldcorp and Gold Fields I view as core holdings; stocks we buy and we just hold through the gold cycle. Neither has any hedges and both provide good upside leverage to the rise in gold prices. With Goldcorp, it's among the lowest-cost producers – only $140 an ounce, I think, in the last quarter. And they have the highest gross margin among the senior golds. They're very profitable, pay a dividend. And for a senior, they also offer a good growth profile with production expected to increase about 50% over the next few years. They have two properties, the E'le'onore deposit and Penasquito in Mexico coming on stream between 2008 and 2010. So that's kind of a core position that I would just continue to hold throughout the course of the bull market.
And Gold Fields—it's kind of similar, but I see it as kind of diversification, because I think you should diversify among companies and countries. Gold Fields was diversifying out of South Africa where I guess they had 60.5% of the reserves, but that's back up to about 79% since they acquired the South Deep Gold Mine. So it's really still a South Africa gold play.
And I guess the other point about that is how the stock has been trading sideways since early 2006, and has failed to break out to the upside yet. So I'm kind of keeping an eye on that; I think we need to see the stock move to $21 to see it break out. What's been holding them back, I think, is they've been affected by a combination of rising costs and the depreciation of the U.S. dollar. Their earnings have been sliding over the past year because of that. Now that we've seen the gold price break higher in all currencies, I think it's just a matter of time before their stock price follows, so I think it's a good buy right now. The $21 level is kind of what I am watching here as the break out on that one.
TGR: And Terrane?
STRUTHERS: Terrane—I think what's happening with that one; I call it the boring period in a junior's life cycle. You know, you first see a stock rises as discoveries are made, and then the speculation subsides, and the stock goes lower. It usually goes sideways as they go through feasibility and as they prepare to go into production. But then as they get closer to production and actually start production, the stock usually starts going up again, anticipating the cash flow.
But I think that's kind of the phase they're in; they're going through feasibility now at Mount Milligan. I think that's very good project; the last study there came out at $2.50 copper and $550 gold. Of course, they're both much higher now, but even at those prices, the internal rate of return was at 20.6% and payback on capital was at 3.9 years. So I think that's very good.
So, it's a big project—1.5 billion pounds of copper and I believe 4.3 million ounces of gold, measured and indicated. The stock is currently around 50 cents, and a market a cap of about $205 million fully diluted. So even if you just ignore the copper and look at the gold, the average for juniors now is about $85 an ounce for gold in the ground. So with 4.3 million ounces, you're looking at US $375 million C$355 million. That equates to about 75% above the current stock price. So the stock is definitely in the lower band of valuation now, so I think it's a good buy here.
TGR: Thank you, Ron, for your time today. (11/20/07)
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